Langley Ward Ltd v Trevor & Anor

Permission for a derivative claim must be refused where the court is satisfied that no director acting in accordance with Companies Act 2006, section 172, would seek to continue it. The inquiry is objective and concerns any such properly acting director, not merely the claimant’s wishes. Relevant considerations include the claim’s strength, value, cost, funding, recoverability, alternative remedies and the company’s likely winding-up. A liquidation may be the appropriate forum for accounting disputes between quasi-partners, particularly where the company is deadlocked and has substantially completed its business. Permission does not automatically entitle the applicant to a company costs indemnity. The statutory preliminary filter should be observed through a clear, fair and candid ex parte presentation.

The claimant, a company representing one of two equal shareholder-directors, sought permission under sections 260 onwards of the Companies Act 2006 to continue numerous derivative claims against the other director. The claims concerned alleged breaches of duty, property transactions, company expenditure, materials, labour and payments made from the defendant’s account. The company was a deadlocked quasi-partnership whose redevelopment business had effectively run its course and which was likely to be wound up. The statutory prima facie filter had been bypassed, and the court considered the application on the evidence and submissions of both sides.

1. Disposition. Permission to continue all the proposed derivative claims was refused. Certain claims failed because they did not disclose a cause of action within section 260(3); the remaining claims failed principally under section 263(2)(a), or because they were more appropriately dealt with in a winding-up.
2. Section 260(3) requires the alleged act or omission to involve negligence, default, breach of duty or breach of trust by a director, and to arise from conduct in the defendant’s capacity as a director. A claim based on conduct predating the company’s incorporation could not satisfy that requirement.
3. Section 263(2)(a) requires refusal where the court is satisfied that no director acting in accordance with section 172 would seek to continue the claim. The test is not whether the particular claimant would pursue it. The relevant matters may include the size and strength of the claim, litigation costs, the company’s ability to fund proceedings, the defendant’s ability to satisfy judgment, exposure to adverse costs, alternative remedies and the impact of a winding-up.
4. The matters specified in section 263(3), including the importance of continuation and the availability of a member’s own cause of action, are non-exclusive. An unfair-prejudice petition under section 994 may be relevant even if it does not readily fall within the expression “cause of action”. A potential just-and-equitable winding-up is also a significant factor in the overall permission decision.
5. The company was deadlocked, had effectively completed its business and was likely to enter liquidation. Accounting disputes concerning materials, labour, payments, loan accounts and set-off could be investigated more efficiently by a liquidator than through derivative proceedings. The court could see no benefit to the company in pursuing positive claims where the defendant was likely to be a substantial creditor.
6. Permission, if it had otherwise been appropriate, would have been conditional on the claimant funding the litigation without recourse to the company. CPR 19.9E does not create an automatic entitlement to indemnity for costs.
7. The ex parte preliminary filter is an important statutory safeguard. An applicant must present each claim, its evidence, legal basis and relevant weaknesses transparently and candidly so that the court can decide on the papers whether the company and proposed defendant should be put to the expense of contesting the application.